Blast from the past

India’s economy is at a “take-off” stage and is poised to grow as much as 10% a year for the next decade, Lehman Brothers Asia Ltd said.

The Indian economy, which has averaged 8.6% growth each year since 2003, is increasing consumption and investment spending just as China and South Korea did during the early stages of their economic development, the report said.

“We judge that India could grow even faster” than it is at present, Lehman Brothers said in the report titled India: Everything to Play For. “This judgement is contingent on India continuing to actively pursue structural economic reforms.”

Financial reforms, including development of a corporate bond market, pensions and insurance will spur investment and add as much as 1.5 percentage points to growth, Lehman said. Better transport and power networks and allowing companies to hire and fire workers will also spur the economy, the Organisation for Economic Cooperation and Development (OECD) had said last week.

Prime Minister Manmohan Singh’s government is aiming to accelerate growth to as much as 10% a year by 2012 to create more jobs and cut poverty in the world’s second most populous country. India estimates 22% of its 1.1 billion people are poor, based on their consumption of food, clothing and other essential items. OECD estimates that the absolute number of poor in India fell for the first time between 1999 and 2004 after the government pursued policies started in 1991 to allow more foreign investment and reduce regulation on industry.

“Economic take-off” was a term coined in 1960 by American economist W.W. Rostow, an adviser to US presidents John F. Kennedy and Lyndon B. Johnson. He said that economies evolve in stages and that a “take-off” is the period when the old blocks and resistance to steady growth are finally overcome.

India’s $906 billion (Rs.35.6 trillion) economy, Asia’s third largest, grew at around 6% in the 1990s and may expand by more than 9% in the current fiscal period for the third year in a row, the government estimates.

The pace is second only to China among the world’s major economies. China’s economy has more than doubled to $2.8 trillion in the past five years.

India’s pace of expansion has helped per capita income to almost double to $800 since 2000, Lehman estimated, boosting users of mobile phone services of Vodafone Essar Ltd and other companies to 148 million in August from 49 million two years ago.

Annual domestic sales of microwave ovens rose 29% in the year ended 31 March and sales of high-end “frost-free” refrigerators are growing at a faster rate than those of the traditional “direct cool” ones, reflecting people’s growing income and aspiration levels, Lehman said.

Lehman said India must make many more changes to unshackle the country’s potential to grow faster. For example, to support India’s nascent boom in business investment, the government must develop a corporate bond market, which today accounts for just 3% of the gross domestic product (GDP).

(This is still happening)

With around half of India’s 1.1 billion people below the age of 25, the nation’s gross domestic savings ratio could rise to 40% by 2025 from the current 34%.

(this is now stuck around 33% – ten years later. Monetary policy that works to lower real rates opportunistically rather than increase them opportunistically will not help)

To mobilize these savings into investment, India must allow expansion of the pension and insurance business. Around 80% of India’s population has no insurance cover, while 88% of the workforce doesn’t contribute to pension schemes, Lehman estimates.

The pension business is not open to foreign investors and there is a 26% limit on overseas investments in local insurance companies.

Prime Minister Singh’s communist allies are opposed to easing rules for foreign investors and resisting plans to liberalize laws that prevent companies employing more than 100 people from firing workers without government permission.

In infrastructure, India’s finance ministry estimates that power shortages alone shave off two percentage points from India’s growth. Efforts to boost power supply by forging a civilian nuclear energy agreement with the US have been thwarted by the communist allies since August, when they threatened to pull the government down on the issue.

(the question is now one of demand for power. when it picks up, will shortages return?)

Singh on Monday told the US President George W. Bush that the agreement has run into difficulties, indicating he’d abandon the pact to prevent the collapse of his government. Singh’s five-year term ends in May 2009.

“Pushing through structural reform will remain a political challenge in the face of headwinds from vested interests and coalition politics,” Lehman said.

“That said, there should be a new window for reform after the next general election in 2009.”